U.S. Trade Benefits From War

By SYLVIA NASAR

Published: March 13, 1991

Correction Appended

As a result of the war in the Persian Gulf and its aftermath, the United States is likely to borrow far less from abroad this year than last. Many forecasters expect the deficit in the current account -- the broadest gauge of the nation's imports and exports of goods and services -- to shrink sharply in 1991.

"We'll see a remarkable improvement," said David Rolley, an economist at DRI/McGraw Hill, an economic consulting firm.

According to a report released by the Department of Commerce yesterday, the United States' current account deficit amounted to $99.3 billion in 1990, down from $110 billion in 1989. The $99.3 billion figure is the smallest gap since 1984.

Here is how the gulf war could narrow the gap even more: For starters, the invasion of Kuwait helped touch off the recession, cooling the nation's appetite for imports. Then, the allied victory caused crude prices to plunge, slashing the bill for imported oil.

In addition, America's allies are contributing about $51 billion to the United States' war kitty, money that otherwise would have had to have been borrowed from private investors overseas.

Finally, postwar rebuilding in the Middle East will increase business for American construction companies and equipment producers. United States arms makers are also expected to benefit as countries restock their arsenals.

In fact, if the allies anted up the bulk of their share of war costs right away, analysts said, the United States could become a net foreign lender, at least for a month or two, for the first time in a decade.

Borrowing less abroad, even temporarily, helps the United States because a smaller current account deficit relieves downward pressure on the dollar and upward pressure on interest rates. That could be important at a time when United States assets are losing some of their allure because investors can now harvest higher returns in, say, Europe.

"Any reduction in the current account deficit is positive in a financial context," says Robert Giordano, director of economic research at Goldman, Sachs & Company. "It will help to limit the buildup of U.S. assets in foreign hands and therefore helps stabilize the dollar and interest rates."

The dollar's recent recovery, for example, has handed the Federal Reserve Board more leeway to fight the recession by reducing the threat of inflation. "The current account collapse gives the Federal Reserve a lot more wiggle room," said Robert Gay, an economist at Morgan Stanley.

The effects of the war on the nation's foreign borrowing are certainly not permanent, and DRI and other forecasters expect the current account to swell again in a year or two.

The nation's current account gap has been narrowing since 1987 when it peaked at $162 billion or 2.6 percent of the gross national product -- the nation's total output of goods and services. The report released yesterday by the Department of Commerce shows a steady pattern of improvement through 1990, in large part, because United States exports of goods and services have been rising while imports continue to slow. And, even before Saddam Hussein's tanks rolled into Kuwait, the Organization for Economic Cooperation and Development in Paris was predicting major gains that are supposed to bring the current account gap below 1 percent of G.N.P. by the end of 1992.

Mr. Giordano of Goldman, Sachs said even a temporary reduction in United States borrowing would buy time for more permanent trends to have an impact. For example, the dollar's slide last year should give United States exports a lift in 1993.

By the same token, the dent made by last fall's budget-cutting deal on the Federal deficit will show through a few years from now. "With fewer demands on resources by the U.S. Government, the United States wouldn't have to import as many resources from abroad," said William Cline, senior fellow at the Institute for International Economics. Compelling Arithmetic

While long-term trends are highly uncertain, the arithmetic for this year seems compelling. Total allied pledges amount to more than $51 billion, just $4.3 billion of which had arrived by the end of the year. Federal officials seem reasonably confident, at this point, that the payments will in fact be made.

According to yesterday's Commerce Department report, last fall's allied contributions were more than offset by $7.1 billion in American asssistance to Egypt and Israel.

"What matters is that six or seven months ago, everyone thought the war was purely a U.S. burden," said Maria Ramirez, president of Maria Ramirez Capital Consultants. "U.S. rates went up, the dollar was sliding and the stock market fell apart. Now it's the other way around."

Lower prices and smaller volumes could trim the 1991 oil import bill. In the last two years, by contrast, more expensive oil increased the current account deficit by $10 billion a year. "The moderation in oil prices is likely to last," said Robert D. Hormats, vice chairman of Goldman, Sachs. "The U.S. is in effect the 14th member of OPEC now."

Correction: March 14, 1991, Thursday An article in Business Day yesterday about stock market activity on Tuesday misstated the date that midmonth short-interest positions in individual stocks on the New York and American stock exchanges will be reported. It is March 21, not March 15, for publication on March 22.